NOTE 9 - FAIR VALUE MEASUREMENTS

Fair Value Information. Accounting standards require us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:


Level 1		Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value
Level 2		Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs
Level 3		Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities

The table below presents disclosures about the fair value of financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements as of December 31 (in millions):


	2014								2013
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	UAL
Cash and cash equivalents		$2,002	$	2,002	$	—	$	—	$	3,220	$	3,220	$	—	$	—
Short-term investments:
Asset-backed securities		901		—		901		—		694		—		694		—
Corporate debt		876		—		876		—		685		—		685		—
Certificates of deposit placed through an account registry service (“CDARS”)		256		—		256		—		301		—		301		—
U.S. government and agency notes		68		—		68		—		38		—		38		—
Auction rate securities		26		—		—		26		105		—		—		105
Other fixed income securities		255		—		255		—		78		—		78		—
Enhanced equipment trust certificates (“EETC”)		28		—		—		28		61		—		—		61
Fuel derivatives asset (liability), net		(717)		—		(717)		—		104		—		104		—
Foreign currency derivatives		2		—		2		—		1		—		1		—
Restricted cash		320		320		—		—		395		395		—		—

	United
Cash and cash equivalents	$	1,996	$	1,996	$	—	$	—	$	3,214	$	3,214	$	—	$	—
Short-term investments:
Asset-backed securities		901		—		901		—		694		—		694		—
Corporate debt		876		—		876		—		685		—		685		—
CDARS		256		—		256		—		301		—		301		—
U.S. government and agency notes		68		—		68		—		38		—		38		—
Auction rate securities		26		—		—		26		105		—		—		105
Other fixed income securities		255		—		255		—		78		—		78		—
EETC		28		—		—		28		61		—		—		61
Fuel derivatives asset (liability), net		(717)		—		(717)		—		104		—		104		—
Foreign currency derivatives		2		—		2		—		1		—		1		—
Restricted cash		320		320		—		—		395		395		—		—
Convertible debt derivative asset		712		—		—		712		480		—		—		480
Convertible debt option liability		(511)		—		—		(511)		(270)		—		—		(270)

Available-for-sale investment maturities—The short-term investments shown in the table above are classified as available-for-sale. As of December 31, 2014, asset-backed securities have remaining maturities of less than one year to approximately 40 years, corporate debt securities have remaining maturities of less than one year to approximately six years and CDARS have maturities of less than one year. U.S. government and other securities have maturities of less than one year to approximately four years.

The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities for the year ended December 31 (in millions):


	2014								2013
	UAL and United				United				UAL and United				United
	Student Loan-Related Auction Rate Securities		EETC		Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability		Student Loan-Related Auction Rate Securities		EETC		Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability

Balance at January 1	$	105	$	61	$	480	$	(270)	$	116	$	63	$	268	$	(128)
Purchases, (sales), issuances and settlements (net)		(84)		(33)		(62)		34		(19)		(4)		—		—
Gains and (losses):
Reported in earnings:
Realized		10		1		(5)		5		3		—		—		—
Unrealized		—		—		299		(280)		1		—		212		(142)
Reported in other comprehensive income (loss)		(5)		(1)		—		—		4		2		—		—

Balance at December 31	$	26	$	28	$	712	$	(511)	$	105	$	61	$	480	$	(270)

United’s debt-related derivatives presented in the tables above relate to (a) supplemental indentures that provide that United’s convertible debt is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in United’s convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the United debt becoming convertible into the common stock of a different reporting entity. The derivatives described above relate to the 6% Convertible Junior Subordinated Debentures due 2030 (the “6% Convertible Debentures”) and the 4.5% Convertible Notes. Gains (losses) on these derivatives are recorded in Nonoperating income (expense): Miscellaneous, net in United’s Statements of Consolidated Operations. These derivatives along with their gains (losses) are reported in United’s separate financial statements and are eliminated in consolidation for UAL.

In October 2014, United used cash to retire, at par, the entire $248 million principal balance of the 6% Convertible Debentures. In January 2015, the holders of substantially all of the remaining $202 million principal amount of the 4.5% Convertible Notes exercised their conversion options. The derivative assets and liabilities associated with the 6% Convertible Debentures and the 4.5% Convertible Notes were settled in connection with the retirement of the related convertible debt. See Note 11 of this report for additional information related to the 6% Convertible Debentures and the 4.5% Convertible Notes.

Derivative instruments and investments presented in the tables above have the same fair value as their carrying value. The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above as of December 31 (in millions):


	Fair Value of Debt by Fair Value Hierarchy Level
	2014										2013
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3
UAL debt	$	11,434	$	12,386	$	—	$	8,568	$	3,818	$	11,539	$	12,695	$	—	$	8,829	$	3,866
United debt		11,433		12,386		—		8,568		3,818		11,388		12,249		—		8,383		3,866

Quantitative Information About Level 3 Fair Value Measurements as of December 31, 2014 ($ in millions)


Item	Fair Value at December 31, 2014		Valuation Technique	Unobservable Input	Input Value
Auction rate securities	$	26	Valuation Service / Broker Quotes	Broker quotes (a)	NA
EETC		28	Discounted Cash Flows	Structure credit risk (b)	4%
Convertible debt derivative asset		712	Binomial Lattice Model	Expected volatility (c) Own credit risk (d)	40% 5%
Convertible debt option liability		(511)	Binomial Lattice Model	Expected volatility (c) Own credit risk (d)	40% 5%

(a) Broker quotes obtained by a third-party valuation service.

(b) Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use when pricing the instruments.

(c) Represents the volatility estimate that the Company has determined market participants would use when pricing the instruments.

(d) Represents the Company-specific risk adjustment that the Company has determined market participants would use as a model input.

Valuation Processes - Level 3 Measurements - Depending on the instrument, the Company utilizes broker quotes obtained from third-party valuation services, discounted cash flow methods, or option pricing methods, as indicated above. Valuations using discounted cash flow methods are generally conducted by the Company. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the Company reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other sources.

The Company uses broker quotes obtained from a valuation service (in replacement of a discounted cash flows method) for valuing auction rate securities. This approach provides the best available information.

Sensitivity Analysis - Level 3 Measurements - Changes in the structure credit risk would be unlikely to cause material changes in the fair value of the EETCs.

The significant unobservable inputs used in the fair value measurement of the United convertible debt derivative assets and liabilities are the expected volatility in UAL common stock and the Company’s own credit risk. Significant increases (decreases) in expected stock volatility would result in a higher (lower) fair value measurement. Significant increases (decreases) in the Company’s own credit risk would result in a lower (higher) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the other.

Fair value of the financial instruments included in the tables above was determined as follows:


Description		Fair Value Methodology
Cash and cash equivalents		The carrying amounts approximate fair value because of the short-term maturity of these assets.

Short-term investments and Restricted cash		Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, (c) internally-developed models of the expected future cash flows related to the securities, or (d) broker quotes obtained by third-party valuation services.

Fuel derivatives		Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.

Foreign currency derivatives		Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.

Debt		Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.

Convertible debt derivative asset and option liability		United used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and the Company’s credit risk component of the discount rate.

NOTE 10 - HEDGING ACTIVITIES